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Tuesday, April 19, 2016

Many people wonder why the price of oil fluctuates so dramatically, and what factors affect both supply and demand for petroleum. Welcome to an interview Darlene Beaubien, an economist who has specialized in energy economics. In addition to the written interview, Darlene was featured on LifeEdge.

1. What is your name and your connection to economics and the oil industry?
My name is Darlene Beaubien. I have worked as a corporate planner and economist for major oil and gas companies for more than 20 years. Also, I’m former president of the Houston Chapter of the International Association for Energy Economics.
Following are some short and simple explanations of common issues in the current environment.

2. Why does the oil industry seem to have boom and bust cycles?
Boom and bust cycles are caused by imbalances between worldwide oil supply and demand.
During periods of high oil prices producers make investments in the oil and gas industry that create jobs, increase the number of operating oil rigs and encourage investments in new technologies. These oil investments lead to discoveries that produce oil for several decades.

However, consumers respond to high oil prices by reducing their demand for oil products such as gasoline, heating oil and jet fuel. The result is lower consumption and the potential for an oil surplus. Periods of significant surplus and shortage of oil result in dramatic changes in prices and create boom and bust cycles in the oil industry.

It should be noted that movements in supply and demand are influenced by factors including international economic performance, government actions, technology, and geopolitical factors.

3. What causes companies and countries to produce too much, even though they know that by producing too much, they'll cause the price to collapse?

Oil companies and countries may produce during periods of surplus for various reasons including:
• The dependence of some countries on oil exports to fund their governments.
• The decision of some energy oil countries to maintain their share of the worldwide market or even to suppress prices to the point that higher cost producers can’t maintain operations
• Contract commitments for services, rigs and products that prevent producers from making immediate reductions in production operations
• The need to continue producing in order to meet cash requirements or to maintain leases.
• Time lags between reduction in rigs and production due to the physical characteristics of the producing properties

4. How has political uncertainty and war affected the price of oil in the past?
Geopolitical events and war are a major risk factor in oil and gas markets. Supply disruptions in major producing countries can cause dramatic price increases. On the other hand, the restoration of production by a previously war torn countries increase supply and could suppress prices. Following are a couple of examples.

• The Iraq war and ongoing violent during the past decade, caused dramatic supply disruptions due the destruction of physical assets (ie. Fields, pipelines) and threats to personnel.
• The restoration of production in Libya in 2015 added to world production and exacerbated the already existing supply surplus.
Changes in political regimes are another geopolitical factor in oil markets. New regimes may attempt to change the terms of existing profit sharing agreements or even nationalize oil producing assets contracted to foreign oil companies.

5. What is the "ideal" price of oil that's high enough to allow producers to cover costs and have a profit, but is low enough for the transportation industry other consumers to not suffer?
The price of oil is set on the global market based on worldwide supply and demand. The ideal price is difficult to determine because exploration and production costs vary widely by location, production source (ie onshore vs onshore), technology, regulations and other factors.

6. What do you think will be the final outcome of this down cycle? Winners? Losers?
In general, the winners in today’s down cycle are the major consumers of oil and gas. Winners include major oil and gas consuming industries including chemical, refining, transportation and electric generation.

Losers are those entities that are major producers of oil and gas. Analysts estimate that 70 small U.S. producers went bankrupt in 2015. Many more are likely to go bankrupt these years. Losing countries include those for whom oil and gas make up large a share of government revenues such as Nigeria, Venezuela and Russia.

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